What is the difference between accumulation and pension phase?
The two key differences between accumulation phase and pension phase are:
- Earnings on fund assets during pension phase are exempt from tax, while earnings during accumulation phase are subject to 15% tax.
- Pension phase is subject to minimum pension payment rules, while accumulation phase has no payment restrictions (assuming the fund member has retired and has reached preservation age, or has satisfied another condition of release, such as turning 65).
Note that a super fund member cannot make contributions to a pension account. A separate accumulation account needs to be opened to accept member contributions, and opting for such a strategy requires additional compliance and administration requirements for an SMSF.
Entering the pension phase
A member of an SMSF can choose from only two types of pensions – an account-based pension or a transition-to-retirement pension. (If you retired before 20 September 2007 however, you may be receiving another type of pension from your SMSF.)
The two types of pensions available are:
- Account-based pension: An account-based pension gives you unlimited access to your account balance but how long your money lasts depends on the investment returns that your pension assets deliver, and the amount you withdraw each year. You also must withdraw a minimum amount each year, based on your age.
- Transition-to-retirement pension (TRIP): A TRIP is available to those who have reached preservation age (age 55 or 56, but moving to age 57 and older), but have not retired from the workforce. You run the TRIP in a similar way to running a regular account-based pension, but you cannot withdraw lump sums from a TRIP (that is, it is a non-commutable pension), and you can withdraw no more than 10% of the account balance each year in pension payments, and you also must withdraw a minimum amount.
Converting a SMSF account from accumulation phase to pension phase involves quite a few steps, and depending on your motivation, it is possible to do these steps yourself. I list what I consider to be the main steps (14) in my book DIY Super For Dummies, 3rd edition (Wiley), although anyone running a SMSF should conduct their own research and ensure any strategy fits in with their individual needs.
How much does an SMSF cost?
You ask how much an accountant/administrator will charge for setting up a pension. You will also need to find out how much the ongoing costs will be for running a fund in pension phase.
The costs of running a SMSF is covered in the SuperGuide article, SMSF: How much does a DIY super fund cost? (updated figures), and in detail in my book DIY Super For Dummies, 3rd edition (Wiley), but briefly here are some of the costs that you can expect for a SMSF in pension phase:
- Starting a pension: Between $110 and $990, depending on service provider and package. I’m aware of one service provider that does it for free, subject to you signing over the administration of the SMSF as well. The administration fee is also very cheap for this provider so I assume most of the service is automated rather than personalised. I understand that you must use a certain bank, and a certain broker for your fund, and the administrator receives commissions from those two financial organisations for locking in clients.
- Trust deed update : Updates can cost from $110, but major updates can cost from $550 to $880.
- Actuarial certificates: Costs between $150 and $550.
- SMSF package deal: Many service providers offer package deals that include starting the pension, and the ongoing administration of your fund. If you do some research to ensure that you’re clear about what you need for your fund, you may get a good deal especially as a new client.
Tip: You can also check out this site for articles on SMSF compliance and SMSF administration, which may give you an insight into what services are available, and at what costs. Alternatively, use any internet search engine such as ‘Google’, ‘Yahoo’ or ‘Bing’, type in SMSF administration’ and check out the services offered by the different administrators, to get a sense of what’s involved. Some of the websites list what is involved in setting up a SMSF pension and also provide lists for other compliance issues as well. The majority of providers simply describe the service they offer, and indicate the fee.